18 March 2015

On 17 July 2014, Timor-Leste's National Procurement Commission (NPC) invited proposals (detailed request) for the "Pre-Front-End Engineering Design Study" for an LNG Plant in Beaçu to process natural gas from the Greater Sunrise field. On 10 March 2015, NPC announced that it intends to award the $3.8 million contract to the British company Foster Wheeler Ltd. La'o Hamutuk protested, explaining that uncertainties and future delays around the gas pipeline from Greater Sunrise to Beaçu make it inadvisable to spend any more of our people's money on this improbable dream. More information on Beacu LNG as well as our letter to NPC are on our website. The following is a slightly abridged version of the letter, with graphics and links added.

The National Procurement Commission's 11 March Intent to Award the LNG Pre-FEED contract to Foster Wheeler states that NPC will respond to protests within five days. La’o Hamutuk hereby protests this award, and we encourage the NPC to suspend processes, including contract awards, for all work related to the Beaçu LNG plant, the Betano refinery, the Sunrise gas pipeline and the highway between Suai and Beaçu.

TL's full entitlement under international law.

Current treaties share undersea oil and gas.

The most important reason not to award this contract is that the LNG plant need gas from Greater Sunrise piped to Timor-Leste, which will not occur in the predictable future. Therefore, this Pre-FEED design is just a waste of money. In order for Timor-Leste to benefit from this project, the following needs to occur:

Timor-Leste and Australian authorities need to reach a secure agreement about maritime boundaries or, at the very least, a long-term agreement about Sunrise unification, applicable laws, and sharing of revenues and risks. We agree with recent Government policy that the CMATS Treaty and Sunrise Unitization Agreement do not respect Timor-Leste’s sovereignty and international law. However, they need to be replaced by something else, hopefully more stable, before investors will be interested in putting money into the Sunrise project.

Timor-Leste, Australia and the Sunrise Joint Venture partners need to agree that the Sunrise field should be developed with a pipeline to Beaçu and an on-shore LNG plant in Timor-Leste. For the last several years, the companies in this project have strongly argued that a floating plant is the most profitable way to liquefy Sunrise gas. Because all sides refuse to divulge information, La’o Hamutuk is unable to evaluate whether the companies and/or TimorGAP are wrong, but it is clear that no agreement will be reached without major changes in the companies’ positions.

The Sunrise Gas Pipeline/LNG plant will have to be commercially viable; investors must be confident enough in the project’s return so that they will invest the several billion dollars it will cost to develop. Over the last several years, the market price of natural gas has fallen sharply, due to non-conventional gas being developed. More recently, the fall in global oil prices has reduced the value of Sunrise output. This uncertainty, combined with reduced revenues, has caused petroleum companies all over the world to reduce their investment and spending on new projects, especially those with unresolved issues or questionable profitability.
Woodside Petroleum, the operator of the Greater Sunrise project, announced last month that it had “exhausted all activities” on Sunrise, and that it was shelving the project indefinitely. CEO Peter Coleman said “…we don’t know what the regulatory framework is, we don’t know what the fiscal framework will be, so we can’t evaluate this project and we can’t put it up to buyers as to being a viable project that they would be interested in.”

Investors, whether they be private companies or the Government of Timor-Leste (through the TimorGAP National Oil Company), need to have money available, as well as sufficient certainty that they will recover their investment and make a profit, to decide to go ahead with the project.
Timor-Leste’s Petroleum Minister has frequently stated that Timor-Leste is ready to spend $800 million to subsidize a pipeline to Beaçu, and perhaps much more for the LNG plant and other Sunrise project components. He has offered to buy the shares of oil companies who are reluctant to develop Sunrise because they see it is unprofitable. We hope that much deeper analysis is done; it would be foolhardy for Timor-Leste to spend a sizable portion of its people’s total wealth (revenues received already from the Bayu-Undan field) on a very expensive, risky project that commercial experts have decided not to invest in. National pride should not override technical expertise and common sense.

It is a challenging, complicated task to evaluate, plan, manage, build, operate and decommission a complex LNG plant project. Sadly, the record of Timor-Leste’s petroleum authorities so far is not encouraging. The Tasi Mane project has suffered repeated delays, changes of plans, wasted money and poor transparency and accountability. TimorGAP has yet to make a convincing case that any component of Tasi Mane is financially or socially beneficial.

The Sixth Constitutional Government has been in office for only a month and needs to determine its priorities in the new political and economic context. It will take time to do this properly, and Timor-Leste should not take on new contractual or financial obligations for projects which may well be cancelled.

TimorGAP showed this status summary for the
Beacu LNG Plant in November 2012.

Since its inception in 2009, Tasi Mane project components are often delayed, with cost estimates rising and falling without explanation. Little information is available about how much Timor-Leste will have to invest in this project and what the return is expected to be. The 2013 Annual Action Plan for MPRM and TimorGAP included “Finalize the FEED study for the LNG plant," but now, two years later, the contract for the Pre-FEED (not FEED) is only just being awarded. Given all the uncertainty, it would be better to wait.

During the last five years, Timor-Leste has spent more than $20 million to explore the Sunrise pipeline option to Timor-Leste, and perhaps more in legal costs. Can we afford to continue to do this?

Last month, La’o Hamutuk suggested that the 2015 state budget should be reduced to adapt to falling oil and gas revenues, the global oil price drop and the rising U.S. dollar. Although the Ministry of Finance declined to accept our recommendation, we continue to believe that caution is appropriate before committing Timor-Leste to additional expenditures, especially those with doubtful benefits.

A few days ago the World Bank and the Ministry of Finance released their Public Expenditure Review on Infrastructure. The report does not specifically discuss the Tasi Mane Project (perhaps due to political concerns), but it underlines the urgency of “addressing the challenge of ‘White Elephants’ (projects with low to negative economic rates of return.)” The findings of this report should be studied carefully before committing further resources to the Tasi Mane project, especially to its Betano and Beaçu components for which detailed design, contracting and construction has not yet begun.

During its four years of existence, TimorGAP has not demonstrated the financial, managerial or technical maturity necessary to manage a project of this magnitude. Last August, La’o Hamutuk raised concerns about TimorGAP’s accountability, income, wisdom and transparency in a letter to the Court of Appeals. A few months later, TimorGAP published its first two annual reports. Although the reports describe great dreams for Beaçu LNG, they are not accompanied by hard facts. On the contrary, the 2013 report shows that TimorGAP has yet to establish the ‘single auditor’ which is a fundamental part of its legal structure, and will not disclose the obligations it has imposed on Timor-Leste through its joint ventures and contracts. When TimorGAP presented to Parliament last November on the proposed State Budget for 2015, its President left before MPs could ask him questions, and his written presentation explained that the money for LNG Pre-FEED in the 2014 budget hadn’t been spent due to delays in tendering, but that the contract would be signed in November 2014. The 2015 State Budget carries over $5 million for the Pre-FEED study from 2014 in the Infrastructure Fund, but will not spend it until 2016, adding $1 million more in 2017.

We hope that the disputes with Australia and Woodside will eventually be resolved. At that point, we will need a timely, objective and comprehensive cost-benefit-risk analysis of the Sunrise development options, independent of political agendas and pre-determined conclusions. If this analysis shows that an LNG plant in Beaçu will provide the best net economic and social benefits to Timor-Leste’s people, then that would be the appropriate time to contract for a pre-FEED design for the LNG plant.

This will be many years in the future, with more advanced technology available and different market dynamics than those existing today, and a study done in 2015 will be obsolete by then. It should also have a broader Terms of Reference – the proposed pre-FEED study focuses almost entirely on construction, with little attention to operation and none to environment, economics or decommissioning.

The Ministry of Finance/World Bank study confirms every citizen’s observations that Timor-Leste has paid for many poorly-planned infrastructure projects which are not properly maintained and operated and provide little public benefit. Cancelling this tender would be an important step toward ending this destructive pattern.

We encourage Timor-Leste not to add more to the 20 million dollars already squandered on the Beaçu LNG dream. Design and construction of the Beaçu LNG plant will cost billions, not millions, but now is a good time to stop and think. Some of Timor-Leste’s petroleum-sector leaders have forgotten that every dollar spent on an unproductive mega-project is a dollar exported to foreign companies and no longer available for a sick child, an impoverished farmer or a family which has no clean water and sanitation.

We realize that we are placing a heavy responsibility on the National Procurement Commission to begin the shift away from a long-established, damaging pattern of behavior. In his inaugural speech, Prime Minister Rui Maria de Araujo said that the new Government would be more “efficient, effective and accountable.” He promised that “We cannot continue allowing waste and the ineffective use of public monies.”